Office Sector Well-Positioned for Slowing Economy

The office sector should remain resilient despite moderating U.S. economic growth, said Transwestern, Houston.

“Signals continue to point to a disciplined office market that will perform well through year-end,” said Transwestern Managing Director of Research Elizabeth Norton. She said annual asking rental rates grew 4.2 percent year-over-year in the second quarter, “the fastest rate this cycle and well above the five-year average.”

Norton noted net job creation averaged 172,000 per month for the first half of the year, down from 223,000 jobs created per month last year per Bureau of Labor Statistics figures. “In this environment, the national vacancy rate held steady at 9.7 percent in the second quarter thanks to healthy pre-leasing levels of newly delivered office assets,” she said.

Net absorption more than doubled to 24 million square feet in the second quarter despite sublet space adding 1.9 million square feet back to available inventory, Transwestern reported. Absorption leaders during the past year included Seattle, Charlotte, N.C., Dallas-Fort Worth and Los Angeles. Seattle posted nearly six million square feet of absorption during the past 12 months, bringing the metro’s vacancy rate down to 6.1 percent, among the lowest of the 49 markets Transwestern tracks.

Office construction activity recently reached its highest level of this cycle, growing 9.6 percent during the prior 12 months, Transwestern reported. It predicted this pace will continue through the remainder of the year. There are currently just over 163 million square feet of office space in the pipeline nationally.

Yardi Matrix, Santa Barbara. Calif., said office sale transaction volume accelerated in the second quarter, with $38.8 billion of sales completed through June. If this pace continues, activity for the year could approach last year’s $91.1 billion total volume. “The decline of the 10-year Treasury yield, which has hovered in the low-2.0 percent range since the beginning of June, should continue to act as a catalyst for transactions,” the company’s National Office Report for July said.

Demand remains “robust” for higher-quality office space with more amenities and heftier price tags, Yardi Matrix said.